Dispelling the myth of ‘cheap’ manual KYC

Keeping corporate costs to a minimum is a fundamental priority of CFOs. One area in which they can make immediate and substantial savings is KYC compliance.

The manual processes that dominate the enterprise remain largely unchanged since the pre-digital age. Labour-intensive, slow and prone to error, they are also expensive: bending and shaping 20th-century practices to meet 21st-century regulatory obligations doesn’t come cheap.

It’s an issue that too many companies are failing to grasp, especially at a time when much more is being expected of them under new anti-money laundering and other regulations. Compliance requires a lot from companies: research, finding the right documents, waiting for third parties to provide their input and man hours to compile the data and make it available to the necessary authorities. To do that manually will take days, even weeks, and the cost of doing it will climb as lawmakers pile more responsibilities on compliance officers.

As we’ve pointed out in previous blogs, an automated solution will effortlessly do all of that for you. At Know Your Customer, we’ve built a digital platform that offers significant savings by taking the legwork out of KYC.

To illustrate to CFOs how investment in our solution can save their company money in very little time, we’ve put together a hypothetical cost analysis of a typical compliance team based on real experiences of companies that have yet to go digital.

It’s built on the principle that there are three main costs to meeting KYC obligations: labour; access to systems and technology; and the opportunity cost of the process, i.e., tasks that could be handled more efficiently by technology, leaving professionals to focus on activities better suited to their expertise.

Historically, KYC really was a simple process. But that was a time when only the compliance officer needed the data required. Today, satisfying regulators requires a more holistic approach in an environment that is ever more interconnected. And that means more pressure on our three cost centres.

So, let’s apply some numbers to our model.

Our conservative estimate for one compliance officer to handle a minimum number of KYC caseloads would be about €25,000 a year. Our model assumes risk-screening costs of €10,000 and access to company registries at €1,000. Also, it estimates that a compliance officer earning €60,000 a year would need to spend a quarter of his or her work time on KYC. With an average of €3,000 a year spent on external audits, the cost of each case averages at €50-€60.

But this is a conservative BASE estimate. Real life isn’t always like that.

For a start, at that rate, our compliance officer will be able to manage a maximum of 500 cases per year. Under new regulatory requirements, companies can be expected to deal with more complex cases more frequently. A more realistic number for the near future would be 1,000 cases, which would require our hypothetical compliance officer to devote almost half their time to KYC and probably even need to hire an assistant.

Corporate structures are more complex than our model allows, and unravelling details on such factors as beneficial ownership would require far more time. It might also involve seeking information from other jurisdictions, possibly those in which assessors don’t already have access to company registries. That becomes especially tricky and time-consuming if those places are China, Russia or any other culture that doesn’t use Latin script. In such cases, market-specific professionals would be required, adding to the costs.

Another little-considered, but no less substantial, expense is that of hiring and staff retention. It costs a lot to train a compliance officer and if they move to positions at another company they take that investment and the learned intellectual property with them.

The costs can add up at a daunting rate. However, that can be overcome through automation. In all three of the costs centres we identified above, the Know Your Customer solution can offer significant savings, from improved processes and procedures and retained IP to the consolidation of disparate contracts.

Furthermore, the process is scalable; it’s built to cope with increasing regulatory demands expected in coming years — years that will almost certainly present companies still reliant on manual compliance processes with even more costs.

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